ISO versus Payment Facilitator: Who Survives?

In our previous articles we wrote how different types of companies could become payment facilitators and benefit from this transition. Such companies include franchisors, SaaS platform owners, online marketplaces, and others. In a separate paper we outlined the key steps an independent sales organization should take to become a payment facilitator.

In this article we are going to explain why payment facilitator model is becoming so popular (attracting more and more entities) while ISO model is gradually dying out, vacating the space for new payment facilitators.

In order to provide a plausible explanation, we need to understand the evolution of the merchant services industry.

Initially, the industry was dominated by ISOs that signed contracts with different acquirers, from which they could get merchant accounts and resell them to prospective merchants. ISOs partnered with various gateways that were integrated with specific acquirers.

At some point many gateways realized that they were loosing profits because they were not offering any merchant services (while merchant services fees were several times higher than gateway service fees). If gateway providers offered merchant accounts themselves (instead of ISOs), they could get their share of merchant services fees beside gateway fees.

Consequently, many gateways started offering their own merchant services (that ISOs could resell as well). So, they got certain commissions from processors/acquirers. As this model emerged, some companies started functioning as both gateways (technical platforms, simplifying the acquirer/processor integration procedure) and merchant service providers.

The first large company to become an MSP was Authorize.Net that initially functioned as a gateway provider, but then started offering merchant services. As of now the company still supports both its own merchant accounts and accounts from other providers.

Another classical example is Stripe. They issue merchant accounts themselves and do not let you use the services of any other acquirers.

Consolidation of payment gateways with merchant services resulted in emergence of several new kinds of intermediary entities, such as payment service providers and payment facilitators. Similarly, at the same time, more and more software platforms started providing payment functions. These developments changed the situation at the market. Traditionally a single prospective merchant was trying to get a merchant account in order to get connected to the payment gateway (using some specific product). However, the new market resembled a set of umbrella-like software platforms. Under umbrella of each of these platforms whole groups of sub-merchants were gathering.

The latter model is becoming more and more popular, especially in view of growing popularity of payment facilitator concept. Payment facilitators found it more profitable to invest into a single processor, handle all the crucial processes (onboarding, reconciliation, chargeback management) in partnership with this specific processor, and get some residual revenue for these merchant services, rather than support different processors.

In general, payment facilitation platform owners realized that is was more profitable to offer integrated solutions without giving merchants the choice of processors. Even though some payment facilitators do support multiple processors, it is a sort of backup (plan B) scenario, and not a marketing option it was in the case of ISOs. If one payment processor gets closed, the payment facilitator can switch the respective sub-merchants to an alternative one it also supports. Another reason to support several processors is the difference in the types of merchant segments: for example, some particular processor can be “reserved” specifically for processing of high-risk sub-merchants’ transactions.

Merchants really do not care much, who is processing transactions for them (Chase, FirstData etc.). They just need to know that they get the best pricing and that they get funded in time. Consequently, they prefer platforms, offering gateway and merchant services as a unified package, while platforms, in their turn, prefer processors that support payment facilitator model. Consequently, the PayFac model keeps gaining popularity.

Conclusion

If you are a prospective merchant, you will witness more and more cases at the market, where in order to work with a specific gateway or software platform, you have to use the merchant account, issued by the acquiring bank this particular gateway/platform supports (is integrated with).

If you are an ISO, you should, probably, start thinking about switching to payment facilitator model and enjoying its benefits. Feel free to consult our materials and specialists at UniPay Gateway to learn how you can make the transition as seamless as possible.